ESSAYS ON INNOVATION, CENTRAL BANK DIGITAL CURRENCY AND ASSET PRICING AMMU GEORGE, ECONOMICS

Abstract

Globally, economies are preparing for a future where innovations accelerate.

Governments are vying to harness new technologies and developing financial

innovations to drive progress. Against such a backdrop, this thesis comprises of

three independent essays on institutions incorporating innovation and the

resulting impact on macroeconomic and financial stability. In the first two

essays, innovation is driven by a central bank who replaces the cash in

circulation with a central bank issued digital currency. The third and final essay

deviates from central bank innovation to an economy where innovation is

driven by firms through Research and Development (R&D).

The distributed ledger technology has sparked the interests in policy makers to

consider a digital replacement of physical cash - the central bank digital

currency (CBDC). Theories suggest that CBDC facilitates an interest-bearing

design that complements existing monetary policy framework, but in reality

cash has never been associated with an adjustable return. Chapter 1 tries to

bridge this gap by examining the economic consequences of an interest-

bearing design of CBDC, and extend the discussion to an open-economy

context with trade and capital flows. Through the lens of a dynamic stochastic

general equilibrium (DSGE) model, the study simulate a baseline scenario

which resembles a cash economy, and two counter-factual scenarios

associated with interest-bearing CBDC- the price rule and the quantity rule

regimes. The simulations show that 1) the price rule regime is welfare-

improving; 2) the adjustable interest rate on CBDC causes uneven distributional

effects between households and nancial investors; and 3) macroeconomic

stability is enhanced with the adjustable interest rate.

In the context of declining cash in circulation, emerging market economies find CBDC as a potential solution to improve financial inclusion. Economies like Uruguay, Thailand, South Africa etc. are actively involved in pilot projects to implement CBDC. In this context, chapter 2 investigates the macroeconomic consequences of implementing an interest-bearing CBDC in the monetary policy framework of an emerging market economy.

Monday

06 Jan 2020

2 pm

Venue:

SHHK/HSS

Conference Room

#05-57

ALL ARE

WELCOME!

SCHOOL OF SOCIAL SCIENCES

NANYANG TECHNOLOGICAL UNIVERSITY

ORAL Examination

(continued…….) The model setup in chapter 2 deviates from chapter 1 in terms of; a) households buy both domestic and imported consumption goods using CBDC 1 b) rms use labour alone as the factor of production2 c) central bank use CBDC interest rate (price rule3) to target CPI inflation instead of domestic price inflation d) central bank engages in sterilised foreign exchange (FX) intervention to target exchange rate. The study simulate a baseline cash economy, a cash economy with FX intervention and a CBDC economy with FX intervention. The simulations show that 1) interest-bearing CBDC is welfare improving for an emerging market economy; 2) the adjustable interest rate on CBDC causes uneven distributional effects between households and financial investors; 3) exchange rate management becomes even more effective when interest-bearing CBDC interacts with sterilized FX intervention; and 4) the financial stability of the economy improves when CBDC interest rate is adjustable.

Chapter 3 deviates from the framework of CBDC to a production based asset

pricing model where innovation is driven by rms through R&D. Chapter 3

examines the implications of wage inertia on macroeconomic aggregates and

asset prices in a production economy where growth is endogenously

determined by innovation as developed by Kung and Schmid (2015). Wage

inertia such as wage stickiness with endogenous labour supply (Uhlig, 2007;

Donadelli and Grüning, 2016) and search and matching models with Nash and

with alternative offer bargaining (AOB) (Christiano et al., 2016) are

incorporated in the Kung and Schmid (KS) model. Following a positive

productivity shock, the AOB model shows a) labour market and asset pricing

moments are closer to the data compared to other types of wage inertia

models and the benchmark KS model b) the impulse response of dividends is

larger - and closer to the data - under AOB compared to the other models since

wages rise the least, as labour, vacancies and unemployment are more

responsive following a positive productivity shock.

1 Households use CBDC to purchase only domestic consumer goods in chapter 1.

2 In chapter 1, firms use imported capital in addition to labour to produce final goods.

As chapter 2 framework incorporates imported consumption goods (to see the impact of CBDC on CPI inflation), we do not include imported capital for the ease of identifying the transmission mechanism. 3 We do not consider quantity rule framework based on the Chapter 1 finding that

quantity rule does not improve economy welfare.

Monday

06 Jan 2020

2 pm

Venue:

SHHK/HSS

Conference Room

#05-57

ALL ARE

WELCOME!

SCHOOL OF SOCIAL SCIENCES

NANYANG TECHNOLOGICAL UNIVERSITY

ORAL Examination

(continued…….)

Proceedings

Duration Session 5 mins Chair Welcome & Introduction of Panel 30-45mins Presentation by Student 15 mins Q&A (by audience – faculty / students) Break Audience to leave the room

30 mins Q&A by Panel 15 mins Chairperson to ask candidate to leave the room and wait outside

Private Panel Discussion and Decision to Pass the Student 15 mins Candidate invited back by Chairperson

Feedback and Outcome of Oral Examination

Monday

06 Jan 2020

2 pm

Venue:

SHHK/HSS

Conference Room

#05-57

ALL ARE

WELCOME!

SCHOOL OF SOCIAL SCIENCES

NANYANG TECHNOLOGICAL UNIVERSITY

ORAL Examination